Fitch: Caixa Reveals Signs of Asset Weakness in Commercial Loans

NEW YORK--()--Brazil's second largest government-sponsored bank, Caixa Economica Federal has revealed modest early signs of commercial loan deterioration in its latest reporting period ending June 30, a negative trend that Fitch Ratings believes is likely in its early stages.

The bank's commercial loan deterioration is being driven by challenging economic conditions for its traditionally lower income customer base, especially for loans to individuals (including personal loans), where nonperforming loans (NPLs) over 90-days past due rose to 6.13% of the gross total, up from 4.88% six months prior. Loans to individuals are more sensitive to the country's weak macroeconomic conditions.

Caixa's high loan growth, averaging about 40% over past three years, and the tepid macroeconomic outlook for 2015 point to the deterioration getting worse over the near term. Favorably for Caixa, the bank's mortgage loan book, roughly 55% of its total loan balance, is showing no signs of weakening and remains below the total loan book's overall average 90-day NPL rate.

Weaker commercial loan asset quality has yet to manifest at the Caixa's two government-sponsored peers, Banco do Brasil (BB), and Banco Nacional de Desenvolvimento Economico e Social. Fitch believes that Banco do Brasil, however, will be more vulnerable to asset quality deterioration in the near term, as similar to Caixa, BB has also exhibited stronger loan growth than the overall market. Neither bank however, has grown at the rate of Caixa.

Fitch considers loan growth well in excess of GDP to be a warning sign that a bank may be more prone to asset quality challenges in the future. High loan growth can mask the increase in impaired loans and NPLs on a relative basis. Further, since loan impairments usually start appearing once loans start to mature and season, it takes time for an uptick in the impairment ratio to become obvious.

Caixa' loan growth is still high, but is slowing relative to the recent past. As of June 2014, Caixa's loans grew at a 28% rate year-on-year. The bank's growth guidance for 2014 is 22%-25%. Decelerating loan growth and the seasoning of loans is likely to be playing a role in the increase in impairment.

Caixa's overall 90-day past due commercial NPLs (including loans to individuals and to businesses) rose to 4.62% as of June 30, a 1.12% increase over the 3.50% rate at the end of December 2013. Commercial loans to companies also experienced an uptick, rising to 3.11% from 2.21% as of year-end 2013.

A graph comparing Caixa's and Banco do Brasil's 90-day NPLs can be found below:

https://www.fitchratings.com/web_content/images/fw/fw-chart-20141003.html

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Contacts

Fitch Ratings
Esin Celasun, +55 21-4503-2626
Director
Latin America Financial Institutions
Rio de Janeiro, Brazil
or
Eduardo Ribas, +55 11-4504-2213
Director
Financial Institutions
or
Matthew Noll, CFA, +1 212-908-0652
Senior Director
Financial Institutions - Fitch Wire
33 Whitehall Street
New York, NY
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Esin Celasun, +55 21-4503-2626
Director
Latin America Financial Institutions
Rio de Janeiro, Brazil
or
Eduardo Ribas, +55 11-4504-2213
Director
Financial Institutions
or
Matthew Noll, CFA, +1 212-908-0652
Senior Director
Financial Institutions - Fitch Wire
33 Whitehall Street
New York, NY
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com